The Role of Taxes in Early Debt Retirement.

This study examines firms that retired debt early to provide evidence on the relation of tax status to the net change in debt associated with early debt retirement and the gain or loss recognized at retirement. An easily computed estimate of the present value of taxes payable is used to identify firms' tax-related incentives. Test results indicate that: (1) low tax firms retire debt early to reduce interest tax shields that cannot be used efficiently, (2) firms use early debt retirements to reduce leverage when it exceeds an optimal level and (3) low (high) tax firms are more likely to select for early retirement debt that results in a gain (loss).